29 January 2018

Do you know that accounting records could be inspected by directors at all times?

Many directors are unaware of their right to inspect accounting records. As a matter of fact, most directors are even uninformed with the legal fact that accounting records should be open for their inspection at all times.

As a result of the above, many directors have blindly waited for the release of financial statements and directors’ report just to evaluate the financial performance of a company, without knowing that they could have requested for an inspection of the accounting records.

Accounting records are defined as, inter alia, the following 7 most common documents in the corporate world:

1. invoices;
2. receipts;
3. orders for payment of money;
4. bills of exchange;
5. cheques;
6. promissory notes; and
7. vouchers

Directors’ right to inspect accounting records at all times is conferred by Section 245(4) of the Companies Act 2016, “[accounting records] shall be kept at the registered office of the company or at such other places as the directors think fit, and shall at all times be open for inspection by the directors.” Such right to inspect has been, literally, described by the High Court of Malaya as being ‘absolute‘, indicating that a director is prima facie entitled to inspect the accounting records without demonstrating or furnishing any particular reason for his request for inspection. In the words of Singapore case of Wuu Khek Chiang George v. ECRC Land Pte Ltd [1999] 3 SLR 65, Such right is a concomitant of the fiduciary duties of good faith, care, skill and diligence which the director owes to the company, and as such, like other rights and powers, must be exercised for the benefit of the company. The obligation of the company to allow inspection by its director is mandatory’.

Since the right of a director to inspect is intertwined with his discharge of duties, it is, therefore, possible to challenge and forfeit the director’s right to inspect by proving that the purpose of inspection in unconnected to the discharge of his director’s duties, or where the purpose of the inspection is for an ulterior or improper purpose. However, it is never easy to discharge such burden, and unless and until one could prove to the satisfaction of the court, it must be prima facie assumed that the director is exercising his right for the benefit of the company.

‘There is judicial dicta to the effect that when there is suspicion and lack of co-operation, a director is all the more entitled, perhaps even obliged, to inspect company’s accounts to protect the interests of the company and its shareholders,’ states in Ho Yee Chin v Ho Min Hao & Ors[2016] 6 CLJ 728.  ‘The right is not only to be exercised or the duty imposed when there is harmony within the company.’

So, instead of innocently waiting for the release of financial statement and director’s report just to evaluate and study the financial position of the company, you may enforce your legal right as a director by just inspecting the above 7 corporate records, and this may completely change your practice as a director in assessing the performance and condition of a company.

1.Ho Yee Chin v Ho Min Hao & Ors[2016] 6 CLJ 728 | 2. Wuu Khek Chiang George v. ECRC Land Pte Ltd [1999] 3 SLR 65 | 3.Dato’ Tan Kim Hor & Ors v. Tan Chong Consolidated Sdn Bhd [2008] 1 LNS 741 CA | 4. Section 245(4) of the Companies Act 2016